NO B.S. FRIDAY: Welcome to the Free Money era

I’ve got a quirky and strange theory, but I reckon it’s a good one… Especially if you’re a property investor.

More and more places are experimenting with a basic wage. Have you got enough property?

Here’s a long run prediction for you. In the not too distant future, the government will give free money to everyone. In a generation, we’ll forget that free money wasn’t once one of the primary roles of government.

The idea I’m talking about is called a ‘basic wage’. The idea is that everyone, no matter what you’re earning, gets enough to live on, for nothing. No centrelink cues, no work for the dole, nothing.

Even the richest people in society will still get paid a wage. It won’t be enough for a lavish lifestyle, but probably enough to get by. Like the dole now.

Whether you want to earn more after that, that’s your call. If you don’t want to, you don’t have to.

This idea has been around for a while. And when I used to hear about it I would just roll my eyes. It seemed both practically and politically impossible.

But now, the more I think about it, it kind of seems inevitable.

Because the reality is that we’re still fighting deflation. For most of the twentieth century we were fighting inflation – rising prices. When prices rise too quickly, it causes havoc in the economy. When money is losing value overnight, you end up putting a lot of energy into managing your money (spending it as quickly as possible).

But so far this century, in the developed world, inflation hasn’t been a problem. In fact, most central bankers are now much more worried about deflation than inflation.

Deflation normally only happens in severe economic circumstances – depressions and so on. And it causes just as much trouble as inflation. Why spend today when things will be cheaper tomorrow? And how do you preserve profit margins when prices are falling?

And in recent years we’ve seen the Fed in the US, and the ECB in Europe come out all guns blazing to try and head off deflation.

Quantitative Easing – a massive experiment in money printing – was aimed at generating a bit of inflation. To pretty much everyone’s surprise, it didn’t work.

Every other time some country tried printing money, it led to inflation, even hyper-inflation. That was the historic precedent, and the logic driving one of the biggest gold bull-runs in years.

But it didn’t happen.

Why? Two reasons. First, stuff is just getting cheaper to make. Once you combine the masses of cheap labour coming on line in China, India and Asia, and combine it with exponential technological growth, you get really, really cheap stuff.

I’m mean look at your phone. Look at the technology embedded in that. Go back 15 years and what’s it worth. $5,000? Easily I reckon. In a world where most people didn’t have mobile phones yet, the I-phone 6 looks totally beam-me-up-Scotty.

But now you can get them for a tenth of the price. That’s deflation.

And the consumer is starting to get maxed out. In Australia, most of our spending goes on stuff we don’t really need. There’s a lot of fat that can be trimmed. And so we’re interested in new stuff, sure, but only if the price is good.

So the point is that our economy has matured to a point that stuff is just getting cheaper – at an exponential pace. Over the longer run it’s going to be incredibly hard to stop this from translating into deflation.

The second reason that Quantitative Easing didn’t work is that the government gave all the money to the banks.

Yep, I know this sounds strange. You had a global financial crisis caused by the banks being dodgy banks and the solution – give money to the banks. Who dreams this stuff up?

(The banks).

Anyway, the banks didn’t let the money swash around the economy. It never reached consumers. Mostly it went on share buy-backs and inflating the stock market.

It was a total con, and slowly, people are waking up to that.

So the question has to be, if we’re printing money to get the economy going again, why are we giving it to the banks? Why not just give it straight to consumers?

That logic is very hard to argue with. And the next time deflation rattles the house, it’s going to be very hard to argue with.

And any political party that adds it to their policy is going to be hard to argue with.

Who do you think will get more votes – the party that says we want to give money to voters, or the party that says we want to give money to the banks?

Starting to look inevitable right?

And the only reason that it hasn’t happened already, is that a basic wage would be massively inflationary. In any other era it would be totally irresponsible.
But right now, we need inflation. We need massive inflationary forces to offset these massive deflationary forces.

Not only is free money a vote winner, it’s sensible economic policy.

Very hard to argue with that.

There are all sorts of issues to work through. Tonnes of them. But ‘issues’ have never stopped a party with a popular policy.

And we’re already seeing cracks in the dam. Utrecht, the second largest city in the Netherlands, just announced that it would implement a state-funded basic wage. It could be the thin end of the wedge.

But just stop and think about what happens to housing in this scenario. Property is pretty much the only thing in the economy not subject to deflation. (Building houses is getting cheaper in some markets and there’s downward pressure on costs, but land is in fixed supply and always increasing).

So we’re effectively strapping an inflationary rocket to land values.

Whooosh!

Maybe it will be ten years, maybe it will be twenty years, but it’s another reason to me to have a good share of my wealth in property.

Politicians with a popular idea, with a personal interest in property wealth?

I’m not arguing with that.

What do you think about my freaky theory? Does it have sound economic basis? Where do you thin prices will be in the next 5 -10 years?

Comments

I have almost finished reading Russell Brands book Revolution, which talks about this being a great economic solution – although he states that the money should be shared out from big company and bank profits too (ideas that might not wash with shareholders!). I see this as viable….and I agree that it is a voting drawcard…easily!
In my opinion you would have to get the Libs pushing the idea as if the Greens or Labour try they will be seen as the bleeding hearts protecting the lower income earners.

Great work John. But if we all have a basic wage and do not have to work in the City, does that mean we no longer need to live in the City and can go live in the nice country or beaches plus buy a cheaper house. A basic wage could mean a boom in rural property at the expense of the big cities.

Seems like an incredibly short sighted and stupid solution with all sorts of very foreseeable (and very bad) consequences in the long run – for that reason alone it will probably become government policy soon. Time to buy gold and property!

Sure. This is a possibility. But I assume, we are a century (if not more) away from practically implementing that. Definitely, when this happens if not along with it, may be the next stage would be governments (or trust sort of structures) would be giving people accommodation facilities, food, clothing and the so called basic needs like internet, virtual reality etc. In order to do that technology needs to improve in a way that buildings of 100-250 storeys of units (accommodating 100 thousands of people in those) should be built, which needs such light weight, dense construction materials. Products associated with transportation facilities, agriculture etc. should be made in a way they last 1000 years with minimal wear and tear.

Entire population needs to be employed sort of 2 days in a week, and given facilities to lead a happy life in exchange, instead of a very less population getting employed full time like the way now. Money wouldn’t exist in such a world. Hence, no banks, insurance companies etc. Just charity organizations and R&D organizations.

Um, so we have no actual increase in wealth but we print money and give that to people which means that prices go up (more money circulating for the same goods and services). Most people get fat and lazy and hooch starts looking good because that’s how you get rid of that nagging sense that you are being totally unproductive. And individual responsibility decreases and entitlement increases (I don’t want to see this in myself or my kids, let alone the nation). Costs rise, so we have to give people more money to cope with rising prices. And that merry-go-round takes off. I get that individuals can still create wealth so we are not talking Communism but we all know the more government intervention, the less wealth a nation has (I think Sweden is about the only exception to that isn’t it?). There are always exceptions and we can improve but I think that our safety net system for disadvantaged, disabled and elderly is one of the best in the world. Fair pay is necessary but only in return for your contribution.

I see this option as an answer to the cash hoarding of large corporations which are effectively funnelling large amounts of wealth toward a relatively centralised group. The irony being, that the more capital removed from general society, the less cash their is to spend and therefore less revenue for organisations to derive from consumers. Couple this with 30 years of efficiency gains in industry with the decoupling of employee remuneration, it should be no surprise that with a future of rising automation / cheap labour, a great deal of modern economies can no longer function with inflation as their growth has been tapped out. Standard basic wages is seen by some as a method for ensuring the masses don’t rise up and the un-necessarily large gap between the top and middle end of town…lets not get started on how the bottom of town is reacting already.

vive la france jon! that was what colonel gadaffi was giving his people : US$500 a week to each family and US$50,000 for a wedding..nice! then the americans couldn’t pay for his oil in gold so they offered him junk bonds (like china) and you know the rest. the french got the aquifer, the brits got his gold(US$160bn) and the americans got free oil! so you are right on target..its just changing thought patterns..lol praise be the lord for the merciful control of the masses.

next step is the eradification of cash. yes..credit cards only! and all your money is in control of the government..you know 40% haircuts on your account(ala cyprus)..its a strange world now indeed. of course we will have electric cars by the millions soon..its all about lithium. and our super petrol guzzling cars will be like dinasours. i gotta see that:-)
cheers ron

Jon technology is forcing this idea. By 2025 a laptop/iPhone will probably be smarter than people. Why would a company hire a person when they can just hire a iPhone?
Robots are ready to take the low skilled jobs. I tell people that there is a robot that costs $50000 that can sort and pack apples by being trained. It can do many other tasks. People don’t get the significance of this.

It might take 3 iPhones collaborating over coffee but experts predict this kind of thing. Specifically Ray kurzweil. I don’t like many of his ideas but he has been very accurate in predicting computer advancement.

In 1985 an iPhone like computer was as big as a building and required large amounts of power. Fast forward 10 years from now and we will see a huge advancement.

Nano bots can go into your blood stream to heal you of common illness. If you don’t want nanotechnology in your blood stream then Mosquitos can be used to inject them. 🙂

And after paying everyone a basic wage do we keep records of their consumption so we can see if they were “good consumers”…..consumed their 3 pair of shoes per year, 10 pair of jeans, 12 shirts, a car every 3 years, attended the gym 5 times a week etc etc. and if not, do we cut their basic wage as punishment or give them more to spend to enable then to become “good consumers”, and thus classify them as “good consumers” or “better consumers” or “excellent consumers” with appropriate rewards…….:-)

Have you done the math’s? Paying just $250 per week to 10m people (being conservative) would cost $130,000,000,000 per year. Talk about maxing out the credit card! Also, giving government handouts for nothing has a negative psychological impact by creating a welfare mentality. This would achieve nothing but a nation of bludgers who expect the government to do everything rather than take initiative themselves. Yes, for the average person the payment is not large, but that’s how psychology works. It’s often the little things that act symbolically to have a big impact.

Dad, GDP and wages delinked in the 1970s due to technology. GDP is increasing while real income declined. Take this forward 20 years and there will be mass unemployment due to robots taking blue collar jobs and Ai taking white collar jobs . Basic wage is one of the solutions.

I love that it would free people from having to work dreary jobs to make ends meet, and would instead follow their passions. Imagine what amazing things can happen in a country full of people passionate about what they do!

The fundamental of the system we ALL work under is exchange. I do/make something for you and you give me something in exchange. The way this is made easy is through the use of money representing the agreed value of the products being exchanged. If you don’t do anything or make anything you get nothing. That keeps everybody busy and sane to I might mention. When you give something to somebody for nothing that’s the exact value he puts on it. This is why the dole is such a cruel activity. It is saying to the person here you go you worthless person I guess we had better give you something seeing you are totally incapable of producing/doing anything anybody wants.
No need to wonder why dole bludgers hate society and vandalise other people’s stuff. They have already been told they are of no use to it, as they can’t make/do anything any other person in the world would want from them. Giving people money and not demanding something back in exchange is the cruellest thing any person, group or government could ever do. It creates criminals. Just look at some of the kids of the wealthy who have never been made to contribute to the family or group or anyone else. They are all either addicts or nuts. Try and have a conversation with one of them some day. You will be astounded at their ideas and the about they think the world works. Just look at the dole bludgers who have never done anything useful in their life. What a sad sack lot they are. No, handing out money without demanding something back in exchange is the most stupid idea ever. It will simply manufacture and guarantee to make more addicts and criminals. It is the cruellest idea of all. Even a baby gives a smile in exchange for being fed and burped and it goes on and up from there.

I agree completely. Whatever problems we might face in the future with the impact of technology, simply putting everyone of welfare is not the solution. It is short sighted and lazy thinking. People who propose this do not understand history. Technology has been putting people out of work for hundreds of years. But it is also creating as many jobs as it eliminates. How many blacksmiths are there around these days? But today there are more car mechanics around than there were blacksmiths. Employment pattern change over time, the only difference is the speed of change is now faster. That is why we must be prepared and agile, always learning new skills, new ideas, and be prepared to take up new challenges. Just giving up and giving everyone the dole is a sure fire recipe for economic and social disaster.

The Romans tried this approach of quelling the masses with its “Soup Kitchen & Circus” handouts.
Whether this was the chicken or the egg, the Empire crumbled.
We need the incentive of reward for effort.
Despite grumbling about ‘Work for the Dole’, many otherwise unemployable folks develop an interest in life and subsequently move forward. A feeling of self worth can work wonders.

A bit late to this discussion, but here’s my two cents, for what it’s worth.
I disagree that inflation is bad, or that it only happens during severe economic conditions. Before the turn of the last century, and the proliferation of central banks, deflation was very much a part of an economy, as much as inflation. Before the 1900’s inflation was generally always matched with deflation.
It was only central banks that decided that deflation was a bad thing and we should only have inflation, and so it came to pass, inflation has only been a feature of modern economies from about the 1910’s onwards (incidentally, the US Federal Reserve Bank came into being in 1913).
Why is deflation the enemy? Deflationary periods are useful to dampen malinvestments and bring the economy back into equilibrium.
Japan is entering it’s third lost “decade” of deflationary period. The various governments of the day have tried desperately to stimulate inflation and asset price growth through massive quantitative easing (far greater than the US) and zero and negative interest rate policies. It hasn’t worked, the inflation rate is still negligible and asset prices are still languishing. And yet Japan is still ticking along nicely and they’re in no immediate economic trouble. Why? Because inflation isn’t needed!
And why are our politicians and central banks so desperate to see inflation? Because it increases asset prices, which brings about the wealth effect and supposedly makes people spend more. And why is this a good thing? Because under a fiat monetary system (pretty much all developed nations and most developing nations) in order for the economy to grow, we need to borrow more, get further and further into debt, consume today and pay it back tomorrow.
The markets can only be gamed for so long before they revert back to the mean. We are probably now entering an extended deflationary period, after more than 100 years of constant inflation. Get used to it, this is most likely the new normal. Governments promising to pay everyone a basic minimum wage will not change this.
Oh, and I’ve said it before and I’ll say it again. In a properly functioning economy, all assets, including property, only rise in line with inflation. Maybe we’re reverting to the mean on that too.

hi kathy, you are quite correct in your essay. its not widely known that the ‘fed’ is owned by the rothschilds..and maybe rockefellers. a govt. bank… no. a private investment bank ..yes, netting the owners trillions of dollars from the usa public in interest. why is it so? i mean that very few know about this.? jfk was assassinated because he took the bank back off the jews and made it a govt. bank ….for just 5 months..then bingo! he’s gone..the c.i.a. have done their dirtywork again…btw..if you want to know about world affairs..go to whatdoesitmean.com and you will find many answers there…enough to make you wonder at the ignorance of the public..(if they care )

Sorry Kathy, you are just wrong. Banks hate inflation. It systematically transfers WEALTH from banks to ordinary people. This is because banks hold their assets as financial obligations, such as mortgage contracts for specified amounts of dollars that depreciate with inflation. On the other hand, ordinary people use inflated incomes to borrow heavily for real assets, such as houses, knowing that repayments will be made in depreciating dollars while the real value of houses and businesses appreciate with inflation. By an opposite process, deflation causes a systematic transfer of WEALTH from ordinary folk to banks, which is why “independent” central bankers are so politically active in presenting inflation as an economic bogey man. The truth is that for 23 years under Menzies, Australia had an average of 5% inflation per year that facilitated rapid growth of a large middle class, which owned their own homes and businesses – a development loathed in equal measure by both banks and socialists!

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